Tag: taxation

INTRODUCTION

A virtual asset is a digitalized representation of an item that has a proper value in a particular environment, for example, Bitcoin, Litecoin, or Dogecoin. In virtual assets, the medium of exchange or the property can be traded, transferred, or invested digitally. Over a decade virtual currencies are also considered virtual assets, virtual currencies are a digital representation of value that has a unit of account, store of value, and medium of exchange, it has also proliferated and has the potential for abuse, corruption, and illicit activity. Virtual assets have potential benefits like they could make payment easier, faster, and cheaper. The Financial Action Task Force (FATF) is an inter-governmental body that aims at preventing the laundering of money and terrorist financing.

All virtual assets are considered to be digital assets, but not all digital assets are virtual assets. Digital assets like bank records, which represent ownership are not considered to be virtual assets. The virtual asset must-have features like whether it can be traded or transferred and used for payment. If the asset is merely just ownership it is not considered a virtual asset. NFT (Non-Fungible Token) is a digital asset that is unique and interchangeable; it is considered to be a digital asset unless used for payment or investment purposes. Worldwide NFT is classified as a non-taxable asset and in the future, it should be considered that the Crypto token is different from digital NFT. Cryptocurrency is a kind of virtual currency that is distributed across an oversized number of computers which makes it impossible to counterfeit or double spend. It is a new paradigm of money. Bitcoin is the most popular cryptocurrency. Other cryptocurrencies are Binance Coin, Solana, and Cardano.

BACKGROUND

The first virtual digital asset, the digital coin Bitcoin was introduced in the year 2009 and now there are nearly 10,000 different types of different assets. In recent years the prices of virtual assets are growing rapidly. Since 2017 the government monitors the development of the virtual asset sector and it also aims to develop the market, prevent unlawful activities and improve transparency in financial transactions. The government also promotes blockchain technology so that innovation can be brought in several areas. The government helps to improve transparency in virtual asset transactions.

VIRTUAL ASSET SERVICE PROVIDER (VASP)

Virtual Asset Service Providers means organizations or persons who conduct activities related to the transfer, exchange, or administration of virtual assets. Regulating the Virtual Asset Service Provider can play an important role in preventing terrorist funding and money laundering. The Virtual Asset Service Provider is an entity that conducts –

1. Exchange between virtual assets and fiat currencies
2. Transfer of virtual asset
3. Exchange between one or more forms of virtual asset
4. Administration of virtual asset
5. Participation in the provision of financial services

FATF closely monitors the development in the crypto-sphere mostly in the virtual asset sector. With the help of G20, FATF has some standards to prevent the misuse of money, laundering, and terrorist financing. FATF standards ensure that virtual assets are treated fairly and the rules apply when they can be exchanged for fiat currencies. VASP includes virtual asset trading service providers, virtual asset safekeeping and administrative service providers and virtual asset digital wallet service providers, and virtual asset digital wallet services that are engaged in purchase and sale, safekeeping and administration, and virtual asset transactions. VASP is engaged to report their transactions to KoFIU. KoFIU set up guidelines in 2018 for anti-money laundering regulations. While dealing with VASP, details are provided about types of suspicious transaction activities while using virtual assets so the bank rejects the opening of the new account for VASP when user information is not provided.  KoFIU has oversight and supervisory function over the virtual asset sector. The government will continue to upgrade the regulatory framework to enhance supervision and risk management.

UNION BUDGET 2022

The Finance Minister announced a scheme for the taxation of virtual digital assets like Cryptocurrencies, Non-Fungible Tokens at the rate of 30%. As there is an increase in the magnitude and frequency of these transactions there is a need to provide a specific tax regime. The income which is proposed under this regime is to be computed without reducing the effect of deduction. Any loss arising out of this would not be allowed to be set off income in any other head. The Budget proposed to introduce TDS at a 1% rate on the transfer of virtual assets. Virtual Digital Asset gifts are also taxed at an applicable rate. The provisions are effective only from April 1, 2022, if a cryptocurrency is transferred before April 1, 2022, these provisions are not applicable.

It was also clearly stated that mere recognition of the digital asset under the income tax is not amounting to granting legal status. This tax is similar to a tax on gambling as it mainly focuses on the interest of an investor. By this budget of 2022, it is clear that if you hold the cryptocurrencies then income derived from these will be taxed to 30 percent and any profit generated by the cryptocurrency trade will be taxed 30 % including the gifts and transfer of these assets. The government has kept a fixed rate of 30% so that all investors pay an equal percentage to the government in the form of tax. The cryptocurrency tax method includes the HIFO method. HIFO inventory helps to decrease taxable income in the company where the highest cost of goods is sold. HIFO method is very beneficial for investors those who often use the highest cost basis coin and apply it to coin sold.

TAXATION

The tax imposed by the central government is quite harsh. The 30% tax rate and restriction to set off losses is a significant deviation from the existing tax principles. It is tough to accept that gifts with respect to digital assets are also taxed. The taxation is clearly defined. Taxation of virtual digital currency means the crypto asset will not be banned. The Cryptocurrency and Regulation of Official Digital Asset Currency Bill, 2021 was also established which threw away the concern of virtual currencies being banned in India. This is another drastic move where even this is recognized as alternate investment equity. Most probably in the future, the RBI may launch its own cryptocurrency. The identity of the payee is difficult to be found in digital asset trade, if the PAN is not available then the TDS will be 20% and provisions related to TDS can also lead to some complications. Government should also allow the gaming industry and others to be developed without the tax burden.

CONCLUSION

Taxation of cryptocurrency to 30% is a positive move as it brings some faith in the investors. The taxation and recognition of crypto is an asset for income tax but it does not provide recognition under the law. When we use cryptocurrency the transaction cost is so low and the transaction can be made at any time and there is no limit for the purchases and withdrawal. It is good that people are exposed to new kinds of digital assets. The main disadvantage of cryptocurrency is that it may have many illegal transactions and it is not possible for the government to keep track down of all of its users. There is a high risk of loss of data, if the user loses the private key to their wallet they will not get it back. Cryptocurrencies within the market are controlled by their creators and some organization. These cryptocurrencies familiarize Indians with the benefits and efficiency of cryptocurrency; it builds an appetite for crypto and employment opportunities that can be given in the field of cryptocurrency. Cryptocurrencies are a worldwide phenomenon that may replace general currencies. It progresses to a cashless society.

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REFERENCES

1. Quimbayo, C. V., & Broby, D. (2021). The Regulation of Initial Coin Offerings, Virtual Assets and Virtual Asset Service Providers.
2. Besley, T., & Persson, T. (2013). Taxation and development. In Handbook of public economics (Vol. 5, pp. 51-110). Elsevier.

This article is written by Sree Lekshmi B J, third year law student of Sastra University, Thanjavur.

INTRODUCTION

Since before the arrival of the first colonists, income taxes have been a common idea. It is regarded as a tax that a citizen pays to the state, based on their income and the profits of their businesses. The state uses the money it receives from taxes for a variety of things, such as providing public services, building infrastructure, paying for the military and other forms of defense, and providing subsidies. The Income Tax Act of 1961 is a sophisticated and extensive statute that covers all of the different laws and rules that govern how the country administers its tax system. Income tax is levied, handled by, collected from, and collected by the Indian government. According to Section 4 of the Indian Income Tax Act, income tax will be assessed for the corresponding assessment year based on each person’s total previous-year income at the rates set out by the Finance Act. As the name suggests, tax deducted at source (TDS) aims to collect money right from the source of income. It combines the ideas of “pay as you earn” and “collect as it is being earned,” and is essentially an indirect method of “collecting tax.” It is important to the government because it gets ready for tax collection, guarantees a steady stream of income, and gives taxes a wider base and greater reach.

In addition, it offers the taxpayer a straightforward and practical method of payment while also distributing the tax’s incidence. The person receiving the income is typically responsible for paying income tax. However, the government makes sure that income tax is taken out of your payments in advance using provisions known as ‘Tax Deducted at Source.’ The net sum is given to the income recipient (after reducing TDS). The recipient will include the gross amount in his income and subtract the TDS amount from his overall tax obligation. The sum already withheld and paid on the recipient’s behalf is accepted as payment in full. The mentioned provisions are used to fulfill the recipient’s tax obligations. As a taxpayer, it is our responsibility to declare the amount of income we have earned and paid taxes on in our income tax return.

According to Section 192 of the Income Tax Act of 1961, anyone responsible for paying any income that is chargeable under the head ‘salary’ must deduct income tax from the assessee’s anticipated income under the head salary. The tax must be computed at the average income tax rate based on the rates currently in effect. The deduction must be made at the time of the actual payment. However, unless the estimated salary income exceeds the maximum amount exempt from the tax that applies to an individual during the relevant financial year, no tax is required to be withheld at the source. Once the tax has been deducted, it must be deposited in a government account, and the employee must be given a certificate of tax deducted at the source (also known as Form No. 16). The employee must include this certificate with his income tax return to receive the TDS credit on their income tax assessment.

Lastly, the employer/deductor must complete Form No. 24Q, Quarterly Statements, and submit it to the Income-tax Department. Salary is said to be the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute gives an inclusive but not exhaustive definition of salary. As per Sec. 17(1), salary includes therein-

• Wages
• Annuity or pension
• Gratuity
• fees, commission, perquisites, or profits in lieu of salary
• Advance salary
• Receipt from provident fund
• Contribution of the employer to a recognized provident fund in excess of the prescribed limit
• Leave encashment
• compensation as a result of variation of service contract etc.
• Government contribution to a pension scheme.

The law mandates that tax be withheld at source from earnings covered by the head salary. As a result, the existence of an employer-employee relationship is a requirement before a specific receipt can be taxed as a head salary. When an employee is subject to the employer’s right to direct how he carries out instructions in addition to working under his direct control and supervision, this type of relationship is said to exist. Therefore, the law essentially mandates the deduction of tax in the following situations: (a) When the employer pays the employee. The income under the head salaries is above the maximum amount not subject to tax, (b) the payment is in the nature of a salary, and (c) the payment has been made. Both payment and deduction of tax are in the hands of the employer.

Even if an individual or HUF is not subject to a tax audit, payments made by them that total more than Rs 50,000 per month must be TDS-deducted at a rate of 5%. Furthermore, individuals and HUF required to deduct TDS at 5% are exempt from applying for TAN. Your employer deducts TDS at the corresponding income tax slab rates. Banks deduct TDS at a rate of 10%. If they don’t have your PAN information, they may also deduct 20%. The income tax Act specifies the TDS rates for the majority of payments, and the payer deducts TDS based on these rates. If your total taxable income is less than the taxable limit and you provide your employer with investment proof (to claim deductions), you are not required to pay any tax. There should be no TDS deducted from your income as a result.

TDS on payment of pension– It has been clarified by CBDT vide circular No. 761 dt. 13/01/98 that in the case of pensioners receiving pension through nationalized banks, provisions of TDS are applicable in the same manner as they apply to the salary income.

TDS on Retirement Benefits: According to section 17, retirement benefits that an employee receives are taxable under the heading salaries as ‘profits in lieu of salaries’. As a result, they are subject to the TDS provisions outlined in Section 192 and other pertinent sections. As a result, when an employee retires, the employer must compute the TDS while taking these factors into account. However, some of these retirement benefits are either fully or partially exempt from taxation under Section 10.

COMPARISON OF GOVERNMENT EMPLOYEES AND PRIVATE SECTOR EMPLOYEES

Rent-Free Accommodation (Unfurnished): It is a benefit that the employee receives from their employer. A prerequisite is simply a non-financial or in-kind benefit provided to an employee. According to the Act’s provisions, these are taxable in the employee’s hands.

• Government Employees: The taxable value of the benefit shall be the License Fees as determined by the Government for the allotment of houses. The License fee is quite nominal.
• Other Employees: House is owned by the Employer. The following shall be the taxable value of the perquisite-
  • If the Population exceeds 25 Lakhs, then 15% of salary.
  • If the Population ranges between 10-25 Lakhs, then 10% of salary.
  • In any other case, 7.5% of salary.

House is taken on lease or rent by the employer: The taxable value of perquisite shall be irrespective of the population. it shall be Actual Rent & 15% of salary whichever is lower.

• Gratuity:
  • Government Employees: The amount of Gratuity received is fully exempt from tax.
  • Other Employees: The Exemption shall be a minimum of the three:
    1. Actual Gratuity Received.
    2. Rs. 1,00,000(Likely to increased to Rs. 20,00,000).
    3. 15/26*Last drawn salary* Completed year of service or part thereof.
• Pension:
  • Government Employees: Fully Exempt.
  • Other Employees:
    1. Non- Government Employees in receipt of Gratuity: Only 1/3rd of the full value of the commuted pension is exempt from tax. So, technically you are required to pay tax on 2/3rd of the value of the commuted pension.
    2. Non-Government Employees not in receipt of Gratuity: Only 1/2nd of the full value of the commuted pension is exempt from tax. Here, you are required to pay tax on half of the value of the commuted pension.

Basis of Difference	Government Employees	Non-government Employees
Entertainment Allowance	Lower of below is allowed as a deduction: 1/5th of salary, or, Rs. 5000	Fully-taxable. No deduction is allowed
Rent-free Accommodation (Unfurnished)	The nominal License fee shall be taxable value.	Certain Percentages of salary shall be taxable value.
Foreign allowances or perquisites	Exempt	Not Exempt

CONCLUSION

The numerous tax benefits enjoyed by the government employee could be one of the reasons which give them an edge over the non-government employee. Tax deducted at Source (TDS), as the name implies, aims to collect money directly from the source of income. It is essentially an indirect way of “collecting tax,” combining the concepts of “pay as you earn” and “collect as it is being earned.” It is crucial to the government because it prepares for tax collection, ensures a consistent income stream, and expands the base and scope of taxes. It also distributes the tax’s incidence while providing the taxpayer with a simple and useful method of payment. Taxes on income are typically paid by the individual receiving the income. However, using a feature known as “Tax Deducted,” the government ensures that income tax is deducted from your payments in advance.

This article is written by Sanskar Garg, a last-year student at the School of Law, Devi Ahilya University, Indore.